Sentiment is bullish judging by the strength of the rally post Brexit. Rallies of this magnitude will impact sentiment, the longer and the stronger the rally, the more bullish people become. The rally has taken many by surprise including me, the actual cause is not clear but I suspect it’s a combination of factors including short covering.
The fundamentals have deteriorated, stimulus is back, furthermore I suspect a very large proportion of investor took short positions post Brexit well below the top as they did not believe the FTSE would go back up. When the FTSE rallied they had to cover theirs shorts and if we are talking about a large number of orders this will fuel the rally.
But the fundamentals are worse than they were pre Brexit so I suspect the downtrend will resume. Sometimes the market will produce some weird moves that not many people expect, fortunately these weird moves don’t occur very often but we have to live with them. The question now is, will the decline resume below the previous high (6380.5) or will the FTSE rally to 6600 before the decline start?
The day before the referendum I predicted a rally to 6600 prior to the bear trend resuming, this is still a possibility. But right now the high at 6380.5 remains intact, as long it remains intact we cannot rule an immediate decline and a resumption of the bear market.
But if the FTSE breaks above 6380.5 the FTSE is expected to climb to 6600. This scenario is possible because sentiment has turned bullish and the pattern on the S&P can be interpreted as the start of medium term rally. In any case the rally won’t be in a straight line because it’s a zigzag [A,B,C] which means when the current rally which is wave A is complete we should see a deep pullback to the 6100-6200 area for wave B, followed by a rally to 6600. This only applies if 6380.5 is broken.
